Was The Smart Money Right About Alphabet Inc (GOOGL)?

Most investors tend to think that hedge funds and other asset managers are worthless, as they cannot beat even simple index fund portfolios. In fact, most people expect hedge funds to compete with and outperform the bull market that we have witnessed in recent years. However, hedge funds are generally partially hedged and aim at delivering attractive risk-adjusted returns rather than following the ups and downs of equity markets hoping that they will outperform the broader market. Our research shows that certain hedge funds do have great stock picking skills (and we can identify these hedge funds in advance pretty accurately), so let’s take a glance at the smart money sentiment towards Alphabet Inc (NASDAQ:GOOGL).

Is Alphabet Inc (NASDAQ:GOOGL) an exceptional investment today? Hedge funds were in an extremely bullish mood even though the number of bullish hedge fund bets retreated by 10 during the second quarter. Alphabet Inc (NASDAQ:GOOGL) was in 157 hedge funds’ portfolios at the end of June. The all time high for this statistics is 167. Our calculations also showed that GOOGL is #5 among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks).

Video: Watch our video about the top 5 most popular hedge fund stocks.

So, why do we pay attention to hedge fund sentiment before making any investment decisions? Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 56 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.

Gabriel Plotkin Melvin Capital Management

Gabriel Plotkin of Melvin Capital Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than quadrupled this year. We are trying to identify other EV revolution winners, so we are checking out this under-the-radar lithium stock. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website to get excerpts of these letters in your inbox. With all of this in mind let’s take a peek at the new hedge fund action encompassing Alphabet Inc (NASDAQ:GOOGL).

How are hedge funds trading Alphabet Inc (NASDAQ:GOOGL)?

At the end of June, a total of 157 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -6% from the first quarter of 2020. Below, you can check out the change in hedge fund sentiment towards GOOGL over the last 20 quarters. With hedge funds’ capital changing hands, there exists a few noteworthy hedge fund managers who were adding to their stakes meaningfully (or already accumulated large positions).

According to Insider Monkey’s hedge fund database, Fisher Asset Management, managed by Ken Fisher, holds the biggest position in Alphabet Inc (NASDAQ:GOOGL). Fisher Asset Management has a $2.1727 billion position in the stock, comprising 2.1% of its 13F portfolio. Sitting at the No. 2 spot is Citadel Investment Group, led by Ken Griffin, holding a $1.5461 billion call position; the fund has 0.6% of its 13F portfolio invested in the stock. Some other professional money managers with similar optimism comprise Cliff Asness’s AQR Capital Management, Rajiv Jain’s GQG Partners and Mark Massey’s AltaRock Partners. In terms of the portfolio weights assigned to each position AltaRock Partners allocated the biggest weight to Alphabet Inc (NASDAQ:GOOGL), around 26.19% of its 13F portfolio. Thunderbird Partners is also relatively very bullish on the stock, dishing out 22.19 percent of its 13F equity portfolio to GOOGL.

Since Alphabet Inc (NASDAQ:GOOGL) has witnessed falling interest from the smart money, it’s safe to say that there lies a certain “tier” of funds who were dropping their entire stakes in the second quarter. Intriguingly, Andreas Halvorsen’s Viking Global dumped the biggest position of the 750 funds followed by Insider Monkey, totaling an estimated $363.9 million in stock, and Eashwar Krishnan’s Tybourne Capital Management was right behind this move, as the fund dropped about $86.2 million worth. These bearish behaviors are intriguing to say the least, as total hedge fund interest fell by 10 funds in the second quarter.

Let’s now take a look at hedge fund activity in other stocks similar to Alphabet Inc (NASDAQ:GOOGL). We will take a look at Alphabet Inc (NASDAQ:GOOG), Facebook Inc (NASDAQ:FB), Alibaba Group Holding Limited (NYSE:BABA), Berkshire Hathaway Inc. (NYSE:BRK-B), Visa Inc (NYSE:V), Johnson & Johnson (NYSE:JNJ), and Walmart Inc. (NYSE:WMT). This group of stocks’ market valuations are closest to GOOGL’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
GOOG 144 14761874 -3
FB 210 25222524 -3
BABA 154 24386257 -13
BRK-B 107 15633556 -8
V 154 17010420 -3
JNJ 94 4731250 12
WMT 60 5829223 5
Average 131.9 15367872 -1.9

View table here if you experience formatting issues.

As you can see these stocks had an average of 131.9 hedge funds with bullish positions and the average amount invested in these stocks was $15368 million. That figure was $13533 million in GOOGL’s case. Facebook Inc (NASDAQ:FB) is the most popular stock in this table. On the other hand Walmart Inc. (NYSE:WMT) is the least popular one with only 60 bullish hedge fund positions. Alphabet Inc (NASDAQ:GOOGL) is not the most popular stock in this group but hedge fund interest is still way above average. Our overall hedge fund sentiment score for GOOGL is 87.5 (out of 100). Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. This is a slightly positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 29.2% in 2020 through October 16th and beat the market by 19.7 percentage points. Unfortunately GOOGL wasn’t nearly as successful as these 10 stocks and hedge funds that were betting on GOOGL were slightly disappointed as the stock returned 10.6% since the end of June (through 10/16) and underperformed the market. We consider this as a short-term issue and expect GOOGL to perform better in the coming months.

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Disclosure: None. This article was originally published at Insider Monkey.